Biden admin said student debt canceled, servicer still says they owe. Now suing

 Borrowers allege in a lawsuit against MOHELA that in some cases they've been waiting years for the debt relief they were promised

For decades, Jaime Maldonado, 47, was coping with the $30,000 in student debt she acquired to attend Heald College, a branch of Corinthian Colleges, a for-profit college chain that collapsed amid legal and government scrutiny in 2015. She left the college in 2010 after she started to feel like the school was enrolling her in classes just to collect money. In the years since, she'd paid what she could, but "figured I'm going to die with this debt and it's going to go with me, and it is what it is," she said.

But when Maldonado heard in June 2022 that the Biden administration was canceling debt for borrowers who attended Corinthian, she felt "a huge relief." In November 2022, Maldonado, who lives in Union City, Calif., received an email from the Education Department saying that her debt would be canceled. The notice said she didn't have to take any action, so Maldonado waited several months before calling her servicer, MOHELA, to follow up.

Now, almost two years and many calls, letters and complaints later, Maldonado's account still shows that she owes on the loan and her credit reports indicate she still has a $30,000 balance. She has gone back and forth between MOHELA and the Education Department trying to get the debt relief she was promised.

"It was always a 'he said, she said,' we're putting blame on them, they're putting blame on this person, and nobody knows anything," she said. Meanwhile, the son Maldonado was pregnant with when she started school is now getting ready to go to college, and the debt from her own schooling still hasn't disappeared.

"It's a looming kind of a stress, knowing that it's there and a worry of 'Am I going to have to pay that back?'" she said. As she prepares to figure out how to pay for her son's college education, she added, "I would definitely feel better if the only debt I had was my actual home and the little car payment I had and my few little credit cards, and it's not outrageous."

Maldonado is now taking even more aggressive steps to get her debt discharged. She's the lead plaintiff in a class-action lawsuit filed in California state court Wednesday that alleges MOHELA is still reporting full balances on the plaintiffs' debts in violation of California consumer-protection laws, and until recently was demanding payments from borrowers on debts they no longer owe. The borrowers at issue in the case are former students of for-profit colleges, who the government determined were scammed by their schools and therefore entitled to have their debt discharged.

"There are so many borrowers who have been held in limbo who are unable to move forward with their lives based on promises and directives that they received directly from the Department of Education," said Ashley Harrington, the senior director of policy and advocacy at the Project on Predatory Student Lending, a nonprofit advocacy group that is representing the borrowers. "The person standing in their way is their servicer - the folks that are supposed to help them with their loans."

Battle over how to make scammed borrowers whole has raged for years

For roughly a year, Harrington's organization and others have been calling attention to the plight of tens of thousands of borrowers who were promised debt cancellation by the government but are being treated as if they still owe the money. It's one of the many challenges borrowers and the student-loan system are facing amid legal wrangling over efforts at reform and a bumpy return to loan payments after a more than three-year pause.

The battle over how to make borrowers who have been scammed by their schools whole has raged for nearly a decade. Students whose schools lied to them during the enrollment process have had the right to have their federal student loans canceled since the early 1990s. But borrowers rarely took advantage of this legal provision, known as borrower defense to repayment, until 2015.

At that point, former for-profit college students, organized by activists, started flooding the Education Department with requests to cancel their debt through the borrower defense program. Former President Barack Obama's administration ultimately created a streamlined process for borrowers seeking relief through this law. But the Education Department under former President Donald Trump, led by Betsy DeVos, walked back those efforts.

Over the course of President Joe Biden's administration, officials have announced plans to wipe out the debt of students who attended certain schools and said these borrowers don't have to take action. But it's been more than two years since some of these announcements, and tens of thousands of borrowers are still waiting for the debt cancellation they were promised, Harrington said.

Some of these borrowers have been waiting for relief from these loans for years, and "now they finally see a light at the end of the tunnel - and yet they can't move forward because their servicer is not doing what they're supposed to do," Harrington said. "We're coming to the end of the Biden-Harris administration, of this first term. We want to make sure that these borrowers actually get the relief that they are promised. We don't know what's going to happen in November."

A MOHELA spokesperson wrote in an emailed statement that as a contractor for the Education Department's Office of Federal Student Aid, the organization "works diligently" to cancel debt through the borrower defense program "under the direction" of FSA.

"MOHELA's highest priority is supporting the borrowers we serve," the spokesperson wrote. "We are proud of our work and record servicing borrowers, and we will vigorously defend ourselves against false allegations."

Scott Buchanan, the executive director of the Student Loan Servicing Alliance, a servicer trade group, echoed the sentiment, saying that when servicers don't cancel debt it's because they're waiting on the go-ahead from the government to do so.

"I get the desire to make this about servicer decisions, but it's not," he said. "I can appreciate the frustration," he said, adding, "certainly that is complicated by the department sending notifications to borrowers with forthcoming forgiveness without a specific timeline."

Indeed, the Project on Predatory Student Lending has taken legal action to pressure the Education Department to cancel debt promptly after the government failed to abide by deadlines to wipe out loans as part of a separate settlement negotiated on behalf of more than 290,000 borrowers who were scammed by their schools.

Still, Harrington said, the California class-action lawsuit's allegations indicate that MOHELA isn't doing what it's been hired and paid by the government to do. For example, the suit alleges that when student loan payments resumed last year after a more than three-year pause, borrowers who, months earlier had been told their debt was cancelled, received bills from MOHELA.

The complaint details stories of borrowers contacting MOHELA several times to inquire about debt that they were told by the government should be canceled, only to be told by MOHELA in some cases that they were past due for payments on debt they'd been told by the government they didn't owe.

"MOHELA is clearly not doing their job," Harrington said. "They are refusing to implement something that was announced in some cases almost two years ago. The department has a role here - they are supposed to hold servicers accountable. The department needs to do its part to provide its oversight, but we also expect MOHELA to do its job."

https://www.morningstar.com/news/marketwatch/20240908181/the-biden-administration-said-their-student-debt-was-canceled-but-their-servicer-still-says-they-owe-now-theyre-suing